Tax-Efficient Structuring (or Restructuring) of Vacation Home Ownership

The California income tax regulations provide that owning a California vacation home is not determinative of your status as a California income tax resident. However, sooner or later, your individual ownership of a California vacation home is likely put a significant amount of your sensitive personal financial information in the hands of the FTB, which might get you invited to a residence audit. That happens when you sell that residence and buy another (“better”) one (as happens with almost all of my cross-border tax clients who have been vacationing seasonally in the Desert for a few years or more).

Upon the sale of your California residence, you are required to file a California individual nonresident income tax return to report even a small gain. At that time, all of the financial information contained on that tax return, as well as your answers to numerous questions about your residency status posed on the return, go into the FTB’s files for their later use. (You are also required to attach to your California nonresident tax return a copy of your federal income tax return – if you file one – and a copy of the tax return you file in your claimed state of residence).

The sale of a California vacation home by a nonresident individual will also subject you to a nonresident withholding tax process, the excess withholding tax on which can take anywhere from six months to more than a year to recover.

Additionally, if you rent your California vacation property, you will be required to file a California individual nonresident tax return every year you receive any gross rental income, disclosing even more information about your worldwide income and days of California presence over a period of years (see our webpage entitled “Nonresident Investors in California Rental Property”).

Unlike holding title to your vacation residence in joint tenancy (often suggested by realtors to avoid California probate at the first death, in the case of ownership by a couple), our tax-efficient cross-border vacation home ownership structures allow you to avoid California probate at both the first and second deaths. They also solve all of the potentially disadvantageous tax effects of individual home ownership. (As noted above, those include: (i) filing nonresident individual income tax returns on their rental or sale; (ii) making significant related financial disclosures to the FTB; and (iii) having tax withheld at the time of sale that you have to wait months or years to recover.)

Our tax-efficient vacation home structures also usually reduce the “effective” tax rate on future gains from sale of the vacation residence for both Federal and California income tax purposes. Additionally, for our nonresident foreign citizen clients, our vacation home ownership structures can also potentially solve other cross-border tax problems, including US estate tax exposure and US gift tax exposure on gifts of interests in the residence.

At Lance Cross-Border Law and Tax, we have significant experience both in structuring the initial purchase of vacation homes and restructuring ownership of existing vacation homes to produce a tax-efficient result. (Our “quiet” restructuring plans don’t trigger a requirement to file a tax return, subject you to nonresident withholding taxes or result in a property tax reassessment.) We welcome inquiries concerning your specific tax situation and invite you contact us at (760) 578-5093, via email at Brent@LanceCrossborder.com or by using our online contact form to learn more about our California nonresident homeownership purchase or restructuring packages. Why not put us to work preventing or solving future California residence tax problems for you today?